Credit Cards 101: Part One

Before you go taking the plunge into the world of credit cards, you should get a little education. Think of this as credit cards 101. Learn what these terms means and you will be able to unravel the mysterious world of credit card lingo and go a long way to keeping yourself out of credit card trouble. Print this alphabetical list out and post it somewhere convenient in your home office so that next time the phone rings with an offer or you’re sorting through the mail and find one, you’ll be armed and ready. • Average daily balance – Remember learning averages back in grade school and that math teacher who told you how much you would need to know math as you grew up? Well, they were right! The average daily balance is how the credit card companies figure out how much you owe each month in finance charges. That’s how much it’s costing you to borrow money from them. They take the sum of how much you spent each day so they can get a total balance due, then they divide that by the number of days in your billing cycle. Then that number is multiplied by the card’s monthly periodic rate, which is just your annual percentage rate broken down in twelve months. • Annual percentage rate – The good news is that companies must, by law, divulge what they are charging you. This way you can shop around and compare rates and find the best deal. The short hand term for it is APR and you’ll see it often when you examine all the fine print the credit companies send you. The APR is the amount of interest, including fees and other costs they may be charging you for your loan. All lenders figure out their APR using a standard method. They take the average compound interest rate and multiply it over what’s called the term of the loan. A card with an APR of 22% will charge you 1.9 percent every month on the amount you borrow. That can really add up! • Cash Advance – This is when you use your credit card to get cash. It’s an out and out cash loan. You should use it only in an emergency, as cash advances tend to cost you a great deal. Each credit card company makes their own determination of the fees and costs for cash advance. Some will charge you a one-time, flat fee others charge a percentage of the cash taken. And just to confuse you even more, some cards offer a kind of either/or scenario in which they will charge you either a flat fee or a certain percentage, which ever is more. Some lenders put a ceiling on how much the customer can be charged for this service, but in any event, cash advances are costly. You will also need to know whether the card charges you for the cash advance fee in your next billing cycle or not. If not, they will most likely take the fee out of the amount you are borrowing. So, let’s say you need $1,000 dollars right away. If the fee is taken out of your loan amount, you will need to ask for a little bit more to cover the cost of the loan up front. Otherwise you may end up holding less money in your hand then you need. Be aware that you will be charged interest on your cash advance from the very second you take that money out. Unlike when you make purchases, generally, there is no “grace period.” Remember, these folks are in business to make money! • Cardholder Agreement – This is where you will find all the really fine print about your credit card. Specifically how much it costs and when you have to pay. The Federal Reserve requires lenders to declare what the APR is, if there are annual fees, what formula they use for calculating your minimum monthly payment, and your rights in case there is a dispute. Most people only read this information when they first sign up for their credit card. This is a bad idea because the credit card company can change the rules any time they want. They do have to give you written notice but that may be buried in that envelope you threw away because you thought it was only junk mail. The rules about these agreements are different in different places. The main thing to remember is that if you want to check up on them, you have to check the rules for the bank in which the card originates. So, you may live in Nevada but the rules that apply to you, may come from Georgia. Be smart and bust out your magnifying glass and read all the fine print! • Default – When you fail to pay on your loan, it’s called going into default. This is something you don’t ever want on your credit report. When you default on a loan from a credit card, the company will call you day and night trying to get their money back. It’s not nice. Do what ever you can but don’t let this happen to you. An ounce of prevention; don’t spend more than you can afford. • Finance Charges – In a nutshell, this is the price you pay for using your credit card. It includes the interest and all other fees the company charges for use of the card. Finance charges may vary for different kinds of uses, i.e.: cash advances vs. purchases. Again, we recommend the magnifying glass. • Grace period – This is the amount of time between when you make your purchase, also known as the “transaction date” and the date on which you are billed, in which the credit card company does not charge you any interest. Without a grace period, you begin to pay interest the minute the transaction is made. Typically lenders offer grace periods of 2o to 30 days. If you are someone who always carries a balance however, guess what? No grace period for you. • Introductory Rate – This is an enticement; a below market interest rate to get you to sign on with the credit card. You need to be wary of the old bait and switch here. Also, the low rates are called Introductory for a reason. They don’t last long. Six months is fairly typical. If you go for it, make sure you know when the low rate and ends and get out of it before the lender jacks the rate up on you. You can get out of it by transferring your balance to another low rate care or just pay your bill in full. • Minimum Payment – This is the least amount of money you can pay on your balance due and not default on your loan. The minimum amount due varies from card to card, and is highly individual. Usually, it is a percentage of the total amount you owe. It’s smart to remember, that the banks are always going to want to hedge their bets. So if they aren’t sure if you can pay, your minimum payment may be higher than someone who owes the same amount but that the lender has more confidence in their ability to pay. • Over your spending limit/Over your credit limit fee – Generally, credit cards come with a spending cap in place. Some may be as low as a few hundred dollars and some may soar into many thousands of dollars. Whatever the limit is know that when you cross it, you pay. Big time. The credit card company will reward your indulgence with a significant fee in addition to the balance owed. • Periodic Rate – No, this isn’t the periodic table! It’s all about the rate of interest your credit card is charging you over a set period of time. The two key periods most credit card company’s deal with and that you need to know about are daily and monthly. In each case, it tells you what your credit is costing you for that set period of time. • Pre-Approved – This is language tat the credit card companies use to make their potential customers feel like they’ve won something special. In fact, it means almost nothing beyond the reality that you have a credit record out there and the company found you. Best to throw these items into your shredder.